If anyone thinks the global oil and gas outlook is gloomy, just take a gander at the premium paid by China's CNOOC for Canada's Nexen Inc. (NXY). CNOOC agreed to pay $15.1 billion in cash to acquire Nexen in the biggest overseas takeover by a Chinese company. CNOOC is paying $27.50 for each common share, a premium of 61% to Nexen's closing price on July 20, according to a recent report by Bloomberg.
This is just one anecdotal story highlighting the ongoing race by the world's most powerful nations to amass the globe's dwindling oil and gas resources. One caveat to the premium offered is the fact that Canada is notoriously resistant to allowing foreign ownership of Canadian resource companies. That said there are many other factors to consider regarding the potential capital appreciation of major oil and gas stocks. According to a recent Reuters report,
China's manufacturing output in July grew at its fastest pace in nine months, helping lift an index of activity in the country's factory sector to its highest level since February and suggesting pro-growth government policies are having an impact.
"China is the biggest driver of oil demand and its overall oil appetite does not seem to have suffered so much, as it builds up infrastructure and crude stockpiles," said Tony Nunan, a Tokyo-based risk manager at Mitsubishi.
Middle East Uncertainty
Oil found some support from supply worries triggered by turmoil in Syria and tension between Iran and the West over Tehran's nuclear program.
As international pressure continues on President Bashar al-Assad's government, Syria acknowledged on Monday that it had chemical and biological weapons and said it could use them if foreign countries intervened in its civil war.
"The risks of escalation of the conflict in Syria, we think, will continue to limit the extent of any bearish sentiment," ANZ analysts said in a note on Tuesday.
In essence, we have the usual suspects regarding supply and demand to consider. Middle Eastern turmoil and China's unending thirst for all forms of energy top the list.
Additionally, the bears have taken control of sentiment lately causing earnings expectations to be lowered significantly. High volatility and abrupt daily swings based on macro-economic data rule the day. Nevertheless, weakness in the market often provides great buying opportunities. I have selected five energy companies reporting earnings this week to review. I believe these stocks are poised to move higher. The bar has been set extremely low this earnings season.
The final piece to the profit puzzle for your portfolio is the fact that all these stocks have strong fundamentals and offer substantial dividend yields ranging from 2.50% to 4.80%. 50% of all historical profits from investing in the stock market have been derived from dividends.
In the following sections, we will take a closer look at these stocks to determine if the mean target prices are justified. We will perform a review of the fundamental and technical state of each company. Additionally, we will discern if any upside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Tuesday's performance for the stocks.
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BP plc (BP)
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BP reports earnings on July 31st. BP is down almost 2% today. The stock is trading down 17% from its 52 week high and has 14% upside potential based on analysts' consensus mean price targets.
The company has many fundamental positives. BP pays a dividend with a yield of 4.75% and a payout ratio of 18.37%. BP has a forward P/E ratio of 6.92. BP is trading for slightly above book value and has a PEG ratio of 1.08.
Kinder Morgan Partners (KMP) and BP plan a partnership to process and store condensates. BP at the outset will ship at least 40K bbl/day to a $200M facility KMP is building near the Houston Ship Channel which will process condensates into various products.
The stock has been in a well-defined uptrend since the start of June. It has recently pulled back to the 20 day sma and is resting on the bottom of the current uptrend channel. I see this as an excellent entry point to start a position.
ConocoPhillips (COP)
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COP reports earnings on July 25th before market open. COP is down almost 2% today. The stock is trading down 7% from its 52 week high and has 13% upside potential based on analysts' consensus mean price targets.
ConocoPhillips plans to achieve growth by focusing on high margin production. The company plans to reinvest cash flows to achieve organic reserves replacement of over 100%.
The company has many fundamental positives. COP pays a dividend with a yield of 4.80% and a payout ratio of 28.27%. COP has a forward P/E ratio of 9.59. COP is trading for slightly above book value. The company trades for 18 times free cash flow.
The stock has been in a well-defined uptrend since the start of June. The stock is now approximately 2% above the 50 day sma and is near the bottom of the current uptrend channel. I see the recent pullback as a buying opportunity.
Chevron Corporation (CVX)
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Chevron reports earnings on July 27th before market open. Chevron is down almost 3% today. The stock is trading down 5% from its 52 week high and has 14% upside potential based on analysts' consensus mean price targets.
The company has many fundamental positives. Chevron pays a dividend with a yield of 3.33% and a payout ratio of 23.27%. Chevron has a forward P/E ratio of 8.81. Chevron is trading for 1.7 times book value. ROE is 23.05% and the net profit margin is 10.73%.
Chevron recently confirmed its purchase of 80% of two blocks in Iraq's Kurdistan. The company sees "considerable promise" despite active diplomatic disputes over the area.
The stock has been in a well-defined uptrend since the start of June. The stock is now resting on the 20 day sma and is near the bottom of the current uptrend channel. The stock looks solid going into earnings.
Occidental Petroleum Corporation (OXY)
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OXY reports earnings on July 26th. OXY is down almost 2% today. The stock is trading down 21% from its 52 week high and has 36% upside potential based on analysts' consensus mean price targets.
The company has many fundamental positives. OXY pays a dividend with a yield of 2.54% and a payout ratio of 22.97%. OXY has a forward P/E ratio of 11.02. OXY is trading for 1.78 times book value. ROE is 18.74% and the net profit margin is 26.02%.
OXY recently named Cynthia Walker as Executive Vice President and CFO effective August 6th. Ms. Walker will assume the position from James Lienert, who has been OXY's Chief Financial Officer for the past two years.
The stock is up approximately 10% from a recent low of $75 which was tested twice. One positive is the stock is resting 1% above the 50 day sma which should provide significant support. I like the stock here.
Exxon Mobil Corporation (XOM)
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XOM reports earnings on July 26th before the market open. XOM is down over 1% today. The stock is trading down 3% from its 52 week high and has 9% upside potential based on analysts' consensus mean price targets.
The company has many fundamental positives. XOM pays a dividend with a yield of 2.68% and a payout ratio of 22.71%. XOM has a forward P/E ratio of 10.48. XOM is trading for 2.54 times book value. ROE is 25.84% and the net profit margin is 8.28%.
XOM is the 800 pound gorilla of the oil and gas industry. If you are looking for a high yielding, solid company with the potential for both capital gain and income production this is it.
The stock is up approximately 10% from a recent low of $75. The stock is trading 1.5% above the 50 sma and 2.05% above the 200 day sma which is a huge positive. These smas should provide significant support. I like the stock going into earnings.
Conclusion
The fact that China is still lurking around the globe securing oil and gas assets is telling. Couple this with a Middle Eastern tinderbox and you could see these stocks surge significantly on any bad news out of the Persian Gulf. The investing public seems to have become immune to negative headlines out of the gulf. I remember a time when Iran's saber rattling coupled with Syria's direct threats would have caused oil to spike significantly. Market participants may be desensitized to the potential downside of a conflict with Iran or Syria by the recent conflicts with Iraq and Afghanistan. I assure you it won't be as painless if something breaks out. If I had to pick one stock to go with it would be XOM, even so, they are all buys at current levels.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in 10% at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses further if you wish.
